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Trading Schemes Bill
Order for Second Reading read.
12.49 pm
Sir Nicholas Scott (Chelsea): I beg to move, That the Bill be now read a Second time.
This is the first time for many years that I have moved a Second Reading without the comforting support of the Dispatch Box. However, the appeal throughout the House of this Bill was not apparent for many of the measures that I moved from the Dispatch Box, especially when I was a Social Security Minister. I hope that the Bill, which has simple aims, will have widespread support and that it will pass swiftly to the statute book.
The Bill seeks to tackle loopholes that have emerged in current legislation governing selling and trading schemes. The Bill does not seek to impose unreasonable restraints on legitimate direct selling businesses. Before turning to the Bill's substance, I should like to thank the Minister for Competition and Consumer Affairs, my hon. Friend the Member for Solihull (Mr. Taylor), and his advisers for their help and guidance. The Department of Trade and Industry published a consultation paper on the issue last year, which provoked considerable interest in this area of commercial activity and, in due course, support for early action, which is represented by the Bill.
I am also grateful to the Direct Selling Association for its advice and guidance. It has taken the lead in advising those engaged in direct selling and by drawing up a code of conduct for its members. In every way, it has sought to ensure that those engaged in direct selling--which, as I shall show, plays a significant part in the overall retail sector of our economy--understand their rights, responsibilities and duties to those to whom they sell.
I am especially grateful to the DSA's director,Mr. Richard Berry, who has been an immense help, and to Mr. Mike Smythe of Lawrence Graham, who also has considerable expertise in this area and helped me in the preparation of the Bill. I also thank hon. Members in all parts of the House who, in one way or another, have expressed their support for the Bill and its aims.
In essence, the Bill is designed to close a loophole in the Fair Trading Act 1973 through which the promoters of a wide range of "get rich quick" schemes have managed to avoid proper regulation. It is estimated--it can only be a tentative estimate--that over the past two years investors, especially those looking for a good way to invest redundancy payments, have lost some £30 million as a result of the way in which some of those schemes have operated.
The most worrying schemes are strikingly similar to the widely reported pyramid selling scams prevalent in Romania and Russia in recent years. Under those schemes, people are persuaded to make regular payments to the promoter and to encourage others to do the same, having been promised that after a time they will receive a large return not only on their own investment but on those made by others whom they have introduced to the scheme. To gain credibility, some of the promoters have made payments to a few of the original participants, but usually within a year many of the promoters have absconded or managed to transfer the accumulated funds into offshore and thus untouchable bank accounts. That type of scheme is not, alas, covered by the present trading laws.
I have been advised by the DTI that the most effective solution--one that the Department is anxious to have on the statute book--would be to widen the scope of the pyramid selling regulations introduced under the Fair Trading Act 1973. The regulations were originally introduced to deal with abuses in the promotion of direct selling businesses. At that time, inexperienced participants were often encouraged to over-invest in stocks and products and were offered no opportunity to recover their investment if they were unsuccessful in their part-time businesses. The purpose of the Bill is to update the existing regulations.
As I have said, it is not my intention to impose bureaucratic restraint on the direct selling industry. The legitimate direct selling of consumer goods now accounts for approximately £1 billion of retail trade and offers very useful part-time employment to thousands of would-be entrepreneurs. It is an industry that deserves encouragement. In view of the growing number of people seeking ways to supplement their family incomes, however, it is right that we should ensure that such opportunities are properly and fairly regulated.
I am aware that some hon. Members--especially my hon. Friend the Member for Southend, East(Sir T. Taylor), who is not able to be here--wish the Bill to go further. I do not believe that it would be practical to produce legislation--certainly not a private Member's Bill--to cover every aspect of the misuse of trading schemes and pyramid selling operations. Once the Bill has reached the statute book, as I hope that it will, it might be possible for the Government or another hon. Member to consider whether other legislation--primary or secondary--could extend the protection of people involved in a sphere of commercial activity which is overwhelmingly positive for our economy as a whole and for those engaged in it, but in which there have been too many abuses in recent years for us to turn our back on them. The Bill is therefore restricted to so-called pyramid selling and similar schemes.
Nearly everyone will have come across pyramid selling or direct selling operations. There is a distinction between them which I shall make clear. Pyramid selling activities, which are covered in the Bill, are the ones about which we should be concerned. I imagine that hundreds if not thousands of our constituents earn or supplement their income by selling goods or services through a trading scheme. This can be a rewarding and legitimate sideline or a lucrative form of full-time self-employment. In many trading schemes, it is also possible to earn by recruiting others and from commission on sales made by those recruits.
These trading schemes provide opportunities for thousands of individuals to become entrepreneurs and perhaps 300,000 men and women supplement their income in this way. Their sales can vary from a few hundred pounds a year to tens of thousands of pounds a year, and hon. Members may be surprised to learn that total annual turnover is estimated to exceed some£300 million. Members of such trading schemes are, in practice, retailers. They are not acting as consumers, so they do not benefit from measures designed to protect consumers. As entrepreneurs, manifestly they take risks. The Fair Trading Act 1973 is designed to provide protection from the greatest risks. Under that Act, it is an offence to persuade someone to make a payment with the promise of rewards for getting others to join the scheme.
That is central to what I am talking about and should ensure that trading schemes are primarily retailing arrangements.
The Act also provides for regulations to ensure that every member of a trading scheme has a fair contract with the scheme's promoter. There can also be regulations about the sort of promotional material that is used to recruit new members. Unfortunately, as we have discovered in recent years, the protection of the Fair Trading Act is not available to members and potential members of all trading schemes. The Bill seeks to extend that scope, but it cannot do everything and some schemes will fall outside its scope.
The greatest risk comes from the expectation of riches from recruiting others. That expectation is created and inflated to persuade gullible people to put money into what I can only call a pyramid scam. If the scheme were subject to the Fair Trading Act, it would be unlawful to accept any payment induced by the prospect of substantial rewards from recruiting others, or even to try to persuade someone to make such a payment.
The basis of pyramid scams is geometric progression. Some of us may remember the story of the Egyptian slave who persuaded his master to agree to give him one grain of rice for the first square of the chessboard, two grains for the second, four for the third, eight for the fourth, and so on. The slave's master was bankrupt before half the chessboard had been covered and accounted for. The slave, like the promoters of modern pyramid selling scams, understood the power of geometric progression.
Promoters of modern scams are greedier even than the Egyptian slave, whose scam involved mere doubling. Modern pyramid scams are more likely to use a higher power, say, of five. In a modern scam, each new member might be expected to recruit five people, who each recruit five people, and so on. There would in theory be 19,530 people in a six-level pyramid of recruits below each member.
If the member paid £50 to join the scam on the basis of £10 for each of the five persons recruited to the next level down, £1 for each person at the next four levels down, and £10 for each person at the sixth level down, in theory he could expect to get more than £160,000. Turn that into a monthly scheme, as is frequently the case--with payments by standing order, of course--and he might expect an annual income of £1,922,560 for every £600 that he pays, although it seems that he would have a fat chance of receiving anything like that.
At first glance, of course, for many people it seems only too easy to earn great sums, and the risks seem remarkably low for the possible returns. In my example, the punter would have covered his stake by recruiting only five others, but only the first to join such schemes receive substantial rewards. Most--in fact, the great majority--of those who join such schemes lose all that they put in. Some people are seduced by the idea of great riches into paying considerable sums--thousands or even tens of thousands of pounds--into such schemes. Many of them, as I said, may have had significant redundancy payments and lost them as a result. Sadly, most have lost virtually all that they paid in. Many have lost hundreds, even thousands of pounds, and some have lost tens of thousands of pounds.
The schemes are nothing less than a swindle of the public. The promoters know full well that the schemes are not subject to the Fair Trading Act controls.
Nevertheless, they often assure potential members that the scheme meets all the requirements of the Act. Indeed, the promotional material and contracts for such schemes often appear fully to meet the requirements of the regulations, even to the extent of including statutory warnings. That appearance of legality--it is just an appearance--is part and parcel of the swindle. The schemes do untold commercial damage to law-abiding schemes and their members. The promoters and members of those schemes say that the law-abiding schemes welcome the existing controls under the Fair Trading Act 1973. As I have explained, the purpose of the Bill is to ensure that members of all trading schemes have similar protection.
As I said at the outset, the Bill is simple in concept.It is designed to widen the coverage of the existing controls under the Fair Trading Act 1973. I shall run briefly through the clauses. Clause 1 would replace section 118 of part XI of the Fair Trading Act 1973, which determines which schemes are subject to the controls specified elsewhere in that part of the Act.
Section 118 limits the controls to schemes in which goods or services or both are provided by a promoter, and--I emphasise the word "and"--the goods and services are supplied by members, and most of the sales do not take place on premises where the promoter or member carries on business, and members expect benefits from the recruitment of other members, whether by themselves or others, from their own or any other member's change of status within a scheme, from supplying goods, training or other services to other participants and from commission on sales by other members. Under existing legislation, the controls apply only to schemes that satisfy all four criteria. However, many schemes, including reputable ones, do not satisfy one or another of the first three criteria. Indeed, almost any scheme could be restructured so that it did not satisfy all the criteria and thus the present controls are effectively voluntary.
Clause 1 would replace the four criteria. Proposed subsection (1) contains two criteria. The first is that the participants expect to benefit from any of the matters specified in proposed subsection (2). The second criterion contains conditions relating to the goods and services sold through the scheme. I shall come later to the definition of "goods" in this context. The conditions for the second criterion are set out in subsections (3) and (4). One or other of the conditions must be met unless the powers provided in proposed subsection (7)(a) are used to disapply the second criterion. That sounds complicated, but if hon. Members look at the Bill, they will see that it is relatively straightforward. The proposed section 118 lists all the ways in which members of trading schemes may earn income. The main ways are introducing others to the scheme and selling goods and services. Other ways are also covered by the Bill. They include commission on sales made by other members, and payments related to the continued participation or promotion, or other change in status, of members. I could go on, but as most of the provisions, if the House passes the Bill this morning, will be set out in greater detail in regulations for which the Bill provides, I hope that the House will look favourably on the legislation.
It is essential that the controls apply to any trading scheme and not only to the very limited number covered by existing provisions. The proposed controls would apply to any trading scheme devised in which the public may be in danger from inducements to make payments based on the prospect of rewards from recruiting others. Clause 1 has been drafted to go as wide as necessary but no wider. As I have explained, proposed section 118(6) makes it possible to narrow the coverage and there are other powers to fine-tune the provisions in the Bill as a whole. Proposed subsection (8) would widen the definition of goods and proposed subsection (9) would define "provision or supply".
Clause 2 is a technical adjustment to the existing legislation. These days, when we pass legislation, we need increasingly to take account of developments in technology and commercial practice. It provides for the regulation of promotional material aimed at potential members. Such material may be advertisements, prospectuses, circulars or notices. The existing regulations apply only to documents, and clause 2 would widen the coverage to all forms of promotional material, such as videos, recorded messages and the use of the Internet, which is now commonly used to reach potential members.
Clause 2 also removes the distinction in section 119 between invitations to people to become participants, and information calculated to lead directly or indirectly to people becoming participants. The present distinction serves no practical purpose.
Clause 3 provides transitional protection, ensuring that nobody can be prosecuted as a result of the wider coverage in the new arrangements unless he has consented to or connived in the act that constitutes the offence.
Clause 4 ensures financial provision for the Bill. However, I understand that the Bill is expected to result in a reduction rather than an increase in public expenditure, which will come as a surprise tohon. Members. Without the Bill, the enforcement authorities have had to use other legislation to protect the public from scams that the Bill, will make subject to the Fair Trading Act controls. Those are expected to be more cost-effective, and thus to result in a reduction in public expenditure.
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